Russia missed a deadline for making bond payments on Sunday, a move signaling its first default on international debt in more than a century, after Western sanctions thwarted the government’s efforts to pay foreign investors. The lapse adds to efforts to seal Moscow off from global capital markets for years.
About $100 million in dollar- and euro-denominated interest payments failed to reach investors within a 30-day grace period after a missed May 27 deadline. The grace period expired Sunday night.
A formal declaration of default would need to come from bondholders because ratings agencies, which normally declare when borrowers have defaulted, have been barred by sanctions from reporting on Russia. The Credit Derivatives Determinations Committee, a panel of investors that rules on whether to pay out securities linked to defaults, hasn’t been asked to make a decision on these bond payments yet.
But it appeared that the payments had not reached bondholders’ accounts as of Sunday night, as required by the bonds’ contracts. On Monday, Russia’s finance ministry said that it had made the payments in May and that they had been transferred to Euroclear, a Brussels-based clearinghouse, but subsequently blocked from reaching bondholders.
Russia is rejecting the default declaration, on the grounds that it has made efforts to pay. Dmitri S. Peskov, the Kremlin’s spokesman, told reporters on Monday that the statements about default were “absolutely illegal.”
“The fact that Euroclear withheld this money, did not transfer it to the recipients, it is not our problem,” Mr. Peskov said. “In other words, there are no grounds to call this situation a default.”
The finance ministry added that the actions of foreign financial institutions were beyond its control and that “it seems advisable for investors to contact the relevant financial institutions directly” over the payments.
Euroclear declined to comment.
“We can expect Russia to stick to its alternative narrative: The default isn’t a default, we tried and it isn’t our fault,” said Tim Samples, a legal studies professor at the University of Georgia’s Terry College of Business and an expert on sovereign debt, adding that Russia also hasn’t submitted to jurisdiction in foreign courts. Still, “that has to be a bit humiliating, even for a country that can survive and maintain a war on its hydrocarbon revenues,” he said.
The risk of default emerged in late February after Russia invaded Ukraine and sanctions were imposed to sever the country from international financial markets. In late May, Russia tried to navigate tightening sanctions that cut off its access to American banks and bondholders by sending the payments to a Moscow-based institution. But ultimately, the funds didn’t make it all the way to bondholders’ accounts because of far-reaching American and European sanctions.
News of Monday’s apparent default showed “just how strong” international sanctions against Russia have been, a senior U.S. administration official said in a background briefing for reporters at the Group of 7 summit in Germany, highlighting the “dramatic” effect on Russia’s economy.
This default is unusual because it’s a result of economic sanctions blocking transactions, not because the Russian government has run out of money. Moscow’s finances remain resilient after months of war, with nearly $600 billion in foreign currency and gold reserves, though about half of that is frozen overseas. And Russia continues to receive a steady influx of cash from sales of oil and gas. Still, a default would be a stain on the country’s reputation that will linger in investors’ memories and probably push up its borrowing costs if it is able to tap international capital markets.
Unlike…
Read More: West Seeks a More Effective Way to Tighten Sanctions on Russia